In business, some investments are not made through your typical brokerage exchanges. Private equity is the name for another form of investment that cannot be done through brokerages like TD Ameritrade or Robinhood.
Many companies are not listed on stock exchanges, such as the NYSE or NASDAQ. Because of this, they can’t receive investments from the general public as their company is not listed publicly. The solution for companies that don’t wish to go public is private equity.
This alternative way of investing allows people to invest in startups and other companies that are not able to go public. There are many investors, like this one here, who have found success in private equity. So, what exactly is private equity then? How does it differ from normal investments on public stock exchanges?
In this article, we’re going to go over what makes private equity differ from other forms of investments, and how you can invest in private equity.
What makes up Private Equity?
To understand private equity, it is important to know the components that make an investment considered to be private equity. For starters, private equity investments typically come from institutional investors or wealthy retail investors. These investors are able to, using one of a few methods, invest in private companies.
In most cases, investors pool their money together to create a private equity fund. In private equity funds, there are Limited Partners and General Partners (LP and GP). The Limited Partners are the owners of the fund, and hold the vast majority of the investment under their names. The General Partners hold a small portion of the fund, but are responsible for managing the fund.
Some advantages of participating in private equity funds are that they have huge upside potential, and will allow you to have a larger say in how a company acts. Some private companies will still not allow their shareholders to vote, but you can choose to not invest in funds that have those kinds of companies.
Types of Private Equity
Before going over exactly how to get started with investing in private equity, you should know the main types of private equity funds:
- Leveraged Buyouts
According to Investopedia, leveraged buyouts are actually the most popular form of private equity funding. These funds go after the entirety of the company, buying them out completely with the intention to rework the inner structure of the company to improve its overall business.
These types of funds can see huge improvements as they can truly revolutionize some companies and turn them around.
- Distressed Funding
Another very popular form of private equity investing is distressed funding. In this type of funding, investors will invest in troubled companies that are struggling financially with intentions that their investment will allow the company to turn its business around.
Another name for this form of funding is vulture funding, and was a very common form of investment in the 2008 financial crisis.
- Venture Capital
You may have heard of the term ‘venture capital’ used before, and it is a form of private equity. Investors essentially provide the money themselves to various companies. It’s that simple.
There are often venture capitalists who become hedge fund managers and form their own funds and invest on behalf of other individuals. Venture capitalists differ from hedge fund managers in that they are responsible for providing the capital for the investment.
- Real Estate
One form of private equity that many people do not realize is private equity, is real estate! There are many real estate firms that invest in various development projects. As pointed out by a research firm by the name of Preqin, funding for real estate projects is expected to increase by 50% by 2023.
How to Invest in Private Equity
Okay. Now that you know the basics for private equity, you’re ready to start researching the various methods and funds that you can participate in to invest in private companies.
To get started, you’re going to want to determine how large of an investment you want to make in your private equity part of your portfolio. If you are looking to put a considerable chunk into private equity, then we recommend looking into a fund of funds private equity investment. The downside to this is that the minimum investment is often $100,000 to $250,000.
Alternatively, you can simply buy an ETF (exchange traded fund) that follows a fund of private equities. There is no investment requirement for the ETFs, as they are over a public exchange.